Here's a riddle for you. Say you could own one of two companies:
- Company A, which earns $2 million with $8 million in net tangible assets, and costs $25 million to purchase.
- Company B, which earns $2 million with $18 million in net tangible assets, and costs $18 million to purchase.
Furthermore, let's assume both companies will have flat unit volume for the foreseeable future. Which one would you pick?
A value investor's dream
Hmm ... let's think about this. If you pick Company B, you get more tangible assets, the same amount of earnings, and you're buying at a multiple of earnings of 9, versus 12.5 for Company A. Not only that, but wasn't Ben Graham, the godfather of value investing, a proponent of buying stocks at a discount to asset values?
Knowledge grows through sharing! To be the best, learn from the best! May all your dreams come true! Collections of Value Investing articles, interviews and videos, especially on Warren Buffett and Charlie Munger and articles from various disciplines to build "Latticework of Mental Models"
Thursday, September 27, 2007
Emil Lee: Buffett's Capital Riddle
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